Kyoto's Great Carbon Offset Swindle

The world's biggest carbon offset market, the Kyoto Protocol's Clean Development Mechanism (CDM), is a global shell game that is increasing greenhouse gas emissions behind the guise of promoting sustainable development. The misguided mechanism is handing out billions of dollars to chemical, coal and oil corporations and the developers of destructive dams -- in many cases for projects they would have built anyway.

According to David Victor, a leading carbon trading analyst at Stanford University, as many as two-thirds of the supposed "emission reduction" credits being produced by the CDM from projects in developing countries are not backed by real reductions in pollution. Those pollution cuts that have been generated by the CDM, have often been achieved at a stunningly high cost: billions of dollars (or pounds) could have been saved by cutting the emissions through international funds, rather than through the CDM's supposedly efficient market mechanism.

And when a CDM credit does actually represent an "emission reduction," there is no global benefit because offsetting is a zero-sum game. If a Chinese mine cuts its methane emissions under the CDM, there will be no global climate benefit because the polluter that buys the offset avoids the obligation to reduce its own emissions. If current trends continue, the majority of the cuts in emissions supposed to be produced under Kyoto will be produced merely by handing in CDM certificates to the UN, instead of through actual pollution reductions.

A CDM credit is known as a "Certified Emission Reduction" (CER), and is supposed to represent one tonne (metric ton) of carbon dioxide not emitted to the atmosphere. Industrialized country governments buy the CERs and use them to prove to the UN that they have met their obligations under Kyoto to "reduce" their emissions. Companies can also buy CERs to comply with national-level legislation or with the EU's Emissions Trading Scheme. Analysts estimate that two-thirds of the emission reduction obligations of the key developed countries that ratified Kyoto may be met through buying offsets rather than decarbonizing their economies.

Almost all the demand for CERs has so far come from Europe and Japan. In the next few years, Australia and Canada could become significant CER buyers. In the longer term, the U.S. could become the largest single market for CDM offsets under the federal climate legislation currently being debated by Congress and regional greenhouse gas reduction measures such as that under design in California. John McCain's recently announced climate plan would, in its early years, allow all supposed emission reductions in the U.S. to be met through domestic and CDM offsets.

Around 2 billion CERs are expected to be generated by the end of the current phase of Kyoto in 2012. At their current price, project developers will sell around £18 billion [US $35.4 billion] worth of CDM credits over the next five years.

The CDM, which is administered by a UN-appointed board of government officials and a Bonn-based secretariat, approved its 1,000th project on April 15 this year. More than twice as many are making their way through the mechanism's Byzantine approvals process.

Any type of technology other than nuclear power can apply for credits. Even new coal plants, if these can be shown to be even a marginal improvement upon existing plants, can receive offset income. A massive 4,000 megawatt (MW) coal plant on the coast of Gujarat, India is expected to soon apply for CERs. The plant will spew into the atmosphere 26 million tons of CO2 per year for at least 25 years.It will be India's third, and the world's 16th, largest source of CO2 emissions.

Many observers had originally hoped that the CDM would primarily be a mechanism for promoting renewables and energy efficiency. Yet if all projects currently in the pipeline generated the CERs they are claiming up to 2012, non-hydro renewables would attract only 16% of CDM funds, and demand-side energy-efficiency projects just 1%. Only 16 solar power projects — less than 0.5% of the project pipeline — have applied for CDM approval.

For a project to be eligible to sell offsets, it is supposed to prove that it is "additional" — it is happening only because the developers will receive the benefit of being able to sell offsets. "Additionality" is key to the design of the CDM: if projects would happen anyway, regardless of CDM benefits, then their offsets would not represent any reduction in emissions.

Judging additionality has turned out to be unknowable and unworkable. It can never be definitively proven that if a developer or factory owner did not get offset income they would not build their project or switch to a cleaner fuel supply — and would not do so over the decade for which projects can sell offsets.

The documents written by carbon consultants to justify why their clients' projects should be approved for CDM offsets contain enough lies to make a sub-prime mortgage pusher blush. One commonly used scam is to make a proposed project look like an economic loser on its own, but a nice little earner once offset income is factored in. Examples include the Indian wind developers who failed to tell the CDM about the lucrative tax credits their projects were earning, and the scores of Chinese hydro developers who claim their projects will produce less than half the electricity expected for dams with their generating capacity.

Off-the-record and in the corridors at the many carbon trading conferences, industry insiders will admit that deceitful claims in CDM applications are standard practice. Everyone in the system knows that everyone else is making up stories, and that the system would cease "working" if they didn't.

The lobby group for the carbon trading industry, the International Emissions Trading Association (IETA), has stated that proving the intent of developers applying for the CDM "is an almost impossible task." Other industry representatives have complained that "good story-tellers" can get a project approved "while bad story-tellers may fail even if the project is really additional."

One glaring signal that many of the projects being approved by the CDM's Executive Board are non-additional is that almost three-quarters of projects were already complete at the time of approval. It would seem clear that a project that is already built cannot need extra income in order to be built.

Michael Wara and David Victor, leading carbon trade analysts from Stanford University, show in a recent paper that "essentially all" new hydro, wind and natural gas fired projects being built in China are applying for CDM offsets. If the developers are being truthful that their projects are additional, this implies that without the CDM virtually no hydro, wind or gas projects would be under construction in China. Given the boom in construction of power projects in China, the fact that it is government policy to promote these types of projects and the fact that thousands of hydro projects have been built in China without any help from the CDM, this is simply not credible.

Additionality also creates perverse incentives for developing country governments not to bring in (or enforce) climate-friendly legislation. Why should a government voluntarily act to cap methane from its landfills or encourage energy efficiency if in doing so it makes these activities "business-as-usual" and so not additional and not eligible for CDM income?

The single project type slated to generate the most CERs is the destruction of a gas called trifluoromethane, or HFC-23, one of the most potent of all greenhouse gases. HFC-23 is a waste product from the manufacture of a refrigerant gas.

Every molecule of HFC-23 causes 11,700 times more global warming than a molecule of CO2. Because of this massive "global warming potential," chemical companies can earn almost twice as much from selling CERs as from selling refrigerant gases. This has spurred concern that refrigerant producers may be increasing their output solely so that they can produce, and then destroy, more waste gases. It is even feared that new refrigerant factories could be built only to destroy HFC-23.

Stanford's Michael Wara estimated in 2006 that the HFC projects then in the CDM pipeline would generate €4.7 billion [US $7.3 billion] in pre-tax revenues for mainly Chinese and Indian manufacturers. According to Wara, destroying the gases will cost less than €100 million [US $157 billion]. Thus the European and Japanese taxpayers and consumers who are ultimately paying for the CERs will spend 47 times more than it will cost the companies to stop venting the gas! Meanwhile €4.7 billion that could have paid for effective decarbonization projects is effectively being given away to increase the profits of a handful of chemical companies.

A rapidly growing industry of carbon brokers and consultants is lobbying for the CDM to be expanded and its rules weakened further. If we want to sustain public support for effective global action on climate change, we cannot risk one of its central planks being a program that is so fundamentally flawed. In the short-term the CDM must be radically reformed, in the longer term, beyond the expiration of the first phase of Kyoto in 2012, it must be replaced.

Patrick McCully is Executive Director at International Rivers in Berkeley, California and the author of Silenced Rivers: The Ecology and Politics of Large Dams(Zed Books, London, 1996; updated edition 2001). He has written numerous articles and reports and made many presentations at universities, conferences and other public events on issues connecting dams, human rights, riverine ecosystems, international development, climate change, energy and water policies.

17 Comments

This article is very sweeping generalization on a market mechanism that was painstakingly evolved through global institutional process. Every major initiative has to go through the learning phase wherein mid course corrections need to be carried out it the direction of the laid down procedures is not in accordance with the intent. Any failings in the initial lauching of the programme should be objectively identified and corrected rather than rushing to conclusions. There are a large number of community based renewable energy and energy efficiency initiatives which would not have been grounded in India had it not been for the incentivization through CDM process which is good socially, economically, and environmentally locally as well as globally. The increasing stringency with which CDM projects are being scrutinized in the recent past and the number of projects that are being subjected review and rejections in an early indication of system becoming more and more mature. Inspite of the best efforts there still could be some undeserving projects but these need to be brought to light (in the current age of information revolution it is neither difficult nor costly) . Calling CDM mechanism as a swindle would be dishonouring the authors of this mechanism as well as the deserving projects which are increasingly becoming possible thanks to CDM process. For e.g., the biogas plants implemented for rural poor to meet their cooking fuel needs got a great booster with CDM mechanism similarly CFL, Solar LED lamps etc as they are being conceived and implemented for the poor with a major revenue coming from CDM. These technologies would not have reached the poor definitely not in the current numbers especially for the poor but for the CDM mechanism. Any criticism has to be constructive rather than being attention seeking and eye catching.

"And when a CDM credit does actually represent an "emission reduction, there is no global benefit because offsetting is a zero-sum game. If a Chinese mine cuts its methane emissions under the CDM, there will be no global climate benefit because the polluter that buys the offset avoids the obligation to reduce its own emissions. If current trends continue, the majority of the cuts in emissions supposed to be produced under Kyoto will be produced merely by handing in CDM certificates to the UN, instead of through actual pollution reductions."

I must disagree. For an example the Chinese CH4 reduction will be given
a value of 2 and the buyer of the credits will be given a value of 2 for their
emissions. The reduction is paid for by the credit certificate earned. The
cost is on the company with the emission and the benefit is with the China
company. This is not a sum of 2 plus 2 for a total of 4, but a 2 minus 2 for
a net reduction. The function remains even with other numbers that you
may wish to use. Furthermore in a GLOBAL climate change a emission
or reduction can be located anywhere and it would affect the total planet.

I've been reading and I understand it as this; everyone starts with a specific amount of allowed emissions (the cap). If a renewable energy project is built in China that reduces their emissions by 10 units, they can sell that benefit to USA (the trade) who is now allowed to increase their emissions by 10 units.

Now suppose for easy math those 10 units represented 10% of both China and USA's emissions. So now we have China at 100% - 10% = 90% and we have the US at 100% + 10% = 110%. We still have the same 200 units of emissions, but now China is getting paid because they are emitting less.

But here are a couple of questions:

What if no one in the USA, or anywhere else for that matter, needs the credit?

What if the USA spends all the money on the reductions and the under developed nations can not afford to buy (or refuse to buy) the credits?

What if the planet cools off over the next 50 years like some say is going to happen?

Your article was the basis for my post on www.cleantechnica.com on this subject. My posting prompted a reply from the United Nation's Public Information officer, and I thought it should be shared:

"You are right to point out the extremely high global warming potential of HFC-23, a by-product in the manufacture of refrigerant HCFC-22. Please know, however, that neither new HCFC-22 factories nor increased production can qualify under the CDM. Factories must show three years of production history up to 2005, and the amount of gas that can qualify is pegged to historical production levels.
David Abbass
Public Information Officer
UNFCCC CDM"

The first car built by Ford was in comparison to todays vehicles, a disaster. But as was previously said here, ya gotta start somewhere. Now, lets see if we can get rid of the backfires, noise, and stink ...

Carbon offset credits are a terrible idea. My first impression of the system was that it was merely a way for large corporations to buy their way out of being energy and environmentally responsible in their day to day operation. It comes as no surprise to me to hear a story like this. Frankly, it is what I had expected from the program.

I am no fan of big government. But, the reality is, legislation and law enforcement is the only thing we have to make sure corporations implement the neccessary technology to protect the people and preserve the future.

I found the article confusing, for example the statement, "If a Chinese mine cuts its methane emissions under the CDM, there will be no global climate benefit because the polluter that buys the offset avoids the obligation to reduce its own emissions." Correct me if I am wrong, but didn't you just say that a Chinese mine did indeed cut its methane emissions? Why should it matter who financed the greenhouse gas reduction? The other issue is the author blaming the system of carbon credits as flawed because achieving the actual reductions cost "billions of dollars (or pounds) could have been saved by cutting the emissions through international funds." What funds are you talking about and why do you think the source of funds would make one iota of difference? Finally, the statement in reference to China reaping credits from projects they would have built anyway, "Given the boom in construction of power projects in China, the fact that it is government policy to promote these types of projects and the fact that thousands of hydro projects have been built in China without any help from the CDM, this is simply not credible." That's like saying builders of new windmills in Holland are suspect because they would have built them anyway regardless of government incentives. My point is, energy providers in China are being rewarded for not building coal-fired plants. Is that so bad?

So, if I get the program correctly, or, as it was sold to me, my solar water heater could net me some monetary credit based on carbon offset that would ultimately be paid for by some polluter that can delay, perhaps forever, their pollution abatement or cleanup. That might seem good for me and should encourage everyone to get on the clean energy payroll. What will happen then is that products of these paying companies will cost more, will need bureaucrats to determine who is on what side of the energy balance for credit or debits, even considering that a small solar user like me would ever be able to really get in the que for credits. And the bigger companies are already corrupting this scheme bigtime, as you illustrated. So, it's OK to pollute as long as you make allot of money doing it. This is completely insane and shows how little thought is given to clean energy and integrity on a world level. I trust this cannot last, but hey, Bush did get a second term and even a first. Maybe more tax cuts for these large corporations will help them pay the pollution debits. Yah, that's the ticket.

Your point that the Kyoto Agreement is a massive fraud foisted on industrialized countries for the purpose of transferring wealth to developing nations is well taken. One can only hope that at some point it will be more economical to build a solar or wind generating facility that one using coal. Only at that point will schemes such as this be abandoned. Until then, the politicians and other scammers will continue to use carbon offsets to line their own pockets and rip off their own people.

How would the mine's emissions reductions fit under the CDM, The Clean Development Mechanism?

I certainly won't argue that the CDM system is a mess. It's in its wild wild west era. As with anything new, the regulatory framework will be developed to counteract the loophole finders. That's how it works. You make a regulation, business finds ways to exploit it or go around it, you adjust the regulation to compensate. It may not be working well, but it is working.

The CDM is all about additionality. The mine is not a good example because it should have been under a cap and trade not CDM. I can't help thinking something got left out of this synopsis or there's another agenda.

I read through McCully's paper. Most notably he seems to use the CDM and the other Kyoto mechanisms interchangeably.

It's clear that the Kyoto protocol and the CDM will serve to promote large hydroprojects (a key issue for International Rivers). I understand how that damages and destroys people and river ecosystems. But building those dams is reducing CO2 which is acidifying the oceans and destroying my coral reefs.

My point is not that we should build dams to save coral reefs. It might be if I used McCully's rationale. My point is the CDM needs work. The reality is we are not going to get there through tax and spend. We need that too, but we need to attack the problem on all fronts, using both tax and spend, and market mechanisms. Market mechanisms are profit based and will generate externalities anytime the regulatory framework is not perfect. Since no regulatory framework is perfect, that's the way it will be. Better to work with it than to dump it Patrick.

While I agree that CDM has proven to be a mechanism quite easy to be gamed, I do not agree with the author's assertion that the Kyoto Protocol is completed flawed. CDM, being one element of the Kyoto Protocol, was originally designed to be transitional anyway. The overarching goal of Kyoto is to cut GHG emissions so as to avoid the catastrophes due to irreversible climate change. The Bush Administration has been using any and all kinds of excuses not to rectify Kyoto, demonstrating no leadership in combating climate change. Please criticize CDM but do not let such criticism to become further excuses.

i've still got a problem with this whole thing... if the fluorinated hydrocarbon is 11k times as bad as CO2, why not have a specific tax on IT and not a trading system which, as is accurately put, just moves the pollution to another source wealthy enough to buy the credits?

in the same vein, H2O is many times more powerful of a "greenhouse gas" than CO2. why not tax water vapor emissions the same way, too. it would be a much stronger force in reducing the alleged "global warming" and speed transitions to non-petrochemical energy sources than trading CO2 credits, wouldn't it?

similarly, as many have pointed out, if a Japanese or US company buys "carbon credits" from some developing country, it basically creates an increase in cost in the buying country and a cash flow to the selling country.

that amounts to little more than the equivalent of an import/export tax or subsidy, mainly driving competitive balance between the countries down the tubes for the "buying country" as well as if it were slapped with an import fee on its products by the "selling country."

and some of us have seen what "good" tariffs and subsidies have done...

makes me oppose Kyoto even more. makes it look like more political BS from more "representatives" who've never soiled the hallowed halls of an Economics 101 classroom.